Question

Please answer all questions in depth for learning purposes.

Analyze the data in Exhibit 5, comparing the data for the two companies. Explain why you think the stock prices of the two companies have behaved the way they have. Explain why the market has assigned a higher pricelearnings ratio to FedEx than it has to UPS

Answer 1

In given exhibit we can see that at initial years i.e. 2012 the difference between P/E of both FedEx and UPS is very high. Though both companies are from same courier industry and both have positive earnings FedEx EPS is $6.44 which is much higher than EPS of UPS which is $0.84 but P/E multiple of UPS is at 88.5 times and P/E multiple of FedEx is 14.7 times this indicates that either of the security is overvalued or undervalued and this mispricing correction happened gradually over next three years where share price of FedEx move up and share price of UPS start falling down. That means market have discovered the fair value for FedEx by giving higher P/E multiple to FedEx. EPS of the FedEx in year 2013 is 85% more than the EPS of UPS and 128% higher in year 2014 because of this price of FedEx has started moving up as investors may have started feeling that on valuation basis FedEx is undervalued stock and hence it starts attracting investors and getting premium. We can also see that UPS is regularly paying high dividends to investors it can be sign that company has idle cash which company don't want to reinvest in business or they don't have expansion plans where as FedEx pays very less dividend and keeps majority of earnings as retained earnings which will increase the shareholders equity and result in higher book value per share. Two companies of same industry generally don't have the huge P/E gap if they are similar in their business size and operations and therefore P/E multiple of these company must converge or the gap between the valuation multiples should be narrowed and same has happen in given case. So, According to me above are the reasons for the share price movements of FedEx and UPS.